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TDY earnings call for the period ending March 31, 2019.

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne Technologies First Quarter Earnings Conference Call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. Jason VanWees. Please go ahead, sir.

Jason VanWees -- Executive Vice President

Great, thank you. Good morning, everyone. This is Jason VanWees, Executive Vice President, and I'd like to welcome everyone to Teledyne's first quarter 2019 earnings release conference call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian; President and CEO, Al Pichelli; Senior Vice President and CFO, Sue Main; and SVP, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibik. After remarks by Robert, Al and Sue, we will ask for your questions.

Of course, before we get started our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in the earnings release and our periodic SEC filings. And yes, actual results may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay both via webcast and dial-in will be available for approximately one month. Here is Robert.

Robert Mehrabian -- Executive Chairman

Thank you, Jason, and good morning everyone and thank you for joining our earnings call. We began 2019 with a strongest first quarter in the Company's history. Sales, earnings, operating margin and cash flow were all records for any first quarter. I'm very pleased with the breadth of our performance across both our short cycle and long cycle businesses with increased sales in every business segment and major product line.

Specifically, in the first quarter sales increased 7.1% of which 5.1% was organic, including 1.3% of currency headwind. Earnings per share of $2.02 increased 11.6% compared to last year. In what is a seasonally weaker period, record first quarter free cash flow of $59 million allowed us to complete the scientific camera acquisition from Roper with only a modest increase in our leverage ratio, that's our debt-to-EBITDA ratio from 1.5 at the end of 2018 to 1.6 as of March 31, 2019.

We also continued to execute our proven strategy, first, to process a well balanced and focused business portfolio. Teledyne is not a complex company, but rather a portfolio of related companies and products with common underlying technologies that serve different customers and markets. Second, we want to continue to improve our operations and, third, to compound growth in earnings and free cash flow, driven by both organic growth and complementary acquisitions.

On that final point, our balance sheet remains exceptionally strong and our acquisition pipeline is healthy. Nevertheless, we always remain a very disciplined acquirer, allocating capital prudently as we successfully integrate acquired businesses.

I will now pass the call to Al and he will comment on the performance of our four business segments.

Aldo Pichelli -- President and Chief Executive Officer

Thank you, Robert. In our Instrumentation segment, overall first quarter sales increased 7.3% from last year. Sales of electronic test and measurement systems increased 21% organically, albeit with an easy comparison. Strong growth was once again led by sales of protocol analyzers. However, sales of specialty digitizers and oscilloscopes also increased a double-digit rate. In the environmental domain, sales increased 6.4%, largely as a result of greater sales of industrial and process gas analyzers and selected (Technical Difficulty) and scientific instruments.

Sales of marine instruments increased slightly in the quarter. Book-to-bill was 1.13 and margins improved as we began to benefit from the aggressive cost reductions in prior periods. Overall, Instrumentation segment operating profit increased 44% and margin increased 392 basis points as a result of greater sales of higher gross margin environmental and electric -- electronic test and measurement instruments and from margin improvement and some sales growth within the marine business.

Turning to Digital Imaging segment, first quarter sales increased 11.5%. Sales of our proprietary medical and dental X-ray detectors increased significantly year-over-year. Sales of micro electro-mechanical systems or MEMS also grew significantly due in part to increased shipments of consumables for life sciences and extreme UV lithography. Sales of advanced detectors and data converters for space and defense increased nearly 10% compared to last year. Finally, the scientific and industrial cameras acquired from Roper performed nicely in the first two months with Teledyne.

In the Aerospace and Defense Electronics segment, first quarter sales increased 3.9% primarily due to strong growth across the majority of our defense electronics businesses, but in particular sales of microwave devices for radar and electronic warfare, as well as specialty high reliability semiconductors. Segment operating margin increased 48 basis points to 18.7% primarily due to larger sales, but also due to margin improvement broadly across the aerospace and defense businesses.

In the Engineering Systems segment, first quarter revenue increased 1.4% with strong sales related to missile defense and nuclear manufacturing programs, partially offset by lower sales of cruise missile engines and energy systems. Segment operating profit largely reflected 80% year-over-year decline in sales of higher margin turbine engines. However, we currently expect sales to increase in the following three quarters and the margin to improve sequentially.

Before turning to Sue, I want to offer some additional commentary regarding our 2019 outlook. Given our strong first quarter results, we currently believe that organic revenue growth in the full year of 2019 will be approximately 4% compared to our prior projection of 35% (ph) to 4% in January of this year. Along with the contribution from the scientific cameras acquisition, that translates to revenue of approximately $3.1 billion for the full year of 2019. Finally, given the timing of shipments and backlog also at a record level, we expect a relatively linear ramp in revenue throughout 2019. I will now turn the call over to Sue.

Susan L. Main -- Senior Vice President and Chief Financial Officer

Thank you, Al, and good morning everyone. I will first discuss some additional financials for the quarter not covered by Robert and Al, and then I will discuss our second quarter and full-year 2019 outlook. In the first quarter, cash from operating activities was $80.1 million compared with cash flow of $71.6 million for the same period of 2018. The cash provided by operating activities in the first quarter of 2019 reflected the impact of higher operating income, offset by higher income tax payments primarily due to the payment of repatriation taxes under the Tax Cuts and Jobs Act of 2017.

Free cash flow, that is cash from operating activities less capital expenditures, was $58.8 million in the first quarter of 2019 compared with $51.8 million in 2018. Capital expenditures were $21.3 million in the first quarter compared to $19.8 million for the same period of 2018. Depreciation and amortization expense was $27.6 million in the first quarter compared to $28.8 million for the same period of 2018.

We ended the quarter with $750.2 million of net debt, that is $856.4 million of debt less cash of $106.2 million for a net debt-to-capital ratio of 24.2%. Stock option compensation expense was $8.9 million in the first quarter of 2019 compared with $4.9 million in the first quarter of 2018.

Turning to our outlook, management currently believes that GAAP earnings per share in the second quarter of 2019 will be in the range of $2.38 to $2.43 per share and for the full-year 2019 our GAAP earnings per share outlook is $9.45 to $9.55, an increase from the prior outlook of $9.25 to $9.35. The 2019 full year estimated tax rate is expected to be 22.3% before discrete items, a 100 basis point increase compared to full-year 2018. In addition, we currently expect significantly less discrete items in 2019 compared with 2018.

I will now pass the call back to Robert.

Robert Mehrabian -- Executive Chairman

Thank you, Sue. We would now like to take your questions. Brad, if you're ready to proceed, please proceed with the question-and-answers.

Questions and Answers:

Operator

Of course. (Operator Instructions) And our first question today comes from the line of Greg Konrad with Jefferies. Please go ahead.

Greg Konrad -- Jefferies -- Analyst

Good morning.

Robert Mehrabian -- Executive Chairman

Good morning, Greg.

Greg Konrad -- Jefferies -- Analyst

Just wanted to touch on test and measurement first, I mean, what type of visibility do you have in that business and appreciating that -- the short cycle nature of the business, I mean what are you hearing from your customers, I mean the organic growth has been pretty impressive.

Robert Mehrabian -- Executive Chairman

Yeah. As you know, Greg, we don't have a whole lot of backlog in that business. I would say, less than a month, maybe three weeks. And so it's not predictable. On the other hand, the business has done exceptionally well starting last year and the first quarter certainly been very positive. We expect it to moderate as the year goes on, especially near the end of the year.

The other -- on the flip side, as you know we have protocol analyzers and we are doing really well in that domain. So it's the protocol sales, coupled to improve the sales in oscilloscopes, especially the oscilloscopes in Europe and Asia, that have contributed to our growth. But I have to tell you it's very difficult at this point to predict what will happen over the longer term.

Greg Konrad -- Jefferies -- Analyst

And then, I mean just tying that into the bigger picture, if you think about the part of the portfolio that short cycle and the 4% expected organic revenue growth for the year, I mean are there specific areas that you've identified as risk or is it more just not having visibility into kind of the back half of the year?

Robert Mehrabian -- Executive Chairman

I think, Greg, as usual we are being a little cautious because we don't have the visibility, as you said, and there is also the unknown that's sitting out there, which is the negotiations with China that can affect our business one way or the other. We are seeing some reduction in our, for example, margins because of the dispute with the Chinese. So we are being cautious basically; yes.

Greg Konrad -- Jefferies -- Analyst

Thank you.

Robert Mehrabian -- Executive Chairman

Thank you, Greg.

Operator

And we do have a question from the line of Jim Ricchiuti with Needham & Company. Please go ahead.

Jim Ricchiuti -- Needham & Company -- Analyst

Thank you. Good morning. Wondering if you could talk a little bit about bookings by segment. It sounds like you're seeing some very nice bookings in the marine instrumentation area, which I guess suggest the recovery in that business a couple of quarters our, but how has bookings been in some of the other business areas?

Robert Mehrabian -- Executive Chairman

Let me just give you the big picture answer and let Al go more into the details. I think overall bookings are about 1.07, 1.06, the ratio. Instruments pretty much track that. But Al, you want to talk a little bit about the marine and other things?

Aldo Pichelli -- President and Chief Executive Officer

Sure, thank you, Robert. I certainly can. In the marine space we did have some very strong bookings in Q4 of last year and that has continued in Q1. So that right now in the marine we're looking at 1.13 book-to-bill in Q1. And if you move down to the environmental and the test and measurement businesses that Robert just spoke to, those are very short cycle, book and burn, backlog less than a month, so that -- the order to book and bill ratios there is just a hair over 1 and that's what historically has been, we really don't expect that to change.

So hence that gives us about 1.07 for the instruments group. If you move down to digital imaging, you know, digital imaging is a fairly broad range of businesses from dental and medical X-rays to MEMS, foundries, to machine vision, to space. And in that area we're a little bit below 1, actually for the quarter we're at 0.95. And if you move down a little bit more to Aerospace, and Defense Electronics, the Aerospace business is sort of flattish, giving some of the activity going on with some of the major airlines and the Defense Electronics, we're on and we've been successful getting on a number of new major programs combined with long running legacy programs and counter measures and data -- and the communications and in radar.

So that our book-to-bill in that segment looks to be about 1.09, which is a healthy number, and that's also a negative segment in which we have a fairly robust backlog. And then finally in Engineered Systems, you may remember, Engineered Systems programs tend to be very lumpy. The shipments are lumpy, the orders are lumpy and to look at specifically one quarter is not a representation of the activities because the book-to-bill for the quarter was high at a 1.43 although I would probably say Engineered Systems for the year is going to be a book-to-bill of about 1. So if you take all that together, it add up to a book-to-bill for Q1 at 1.07.

Jim Ricchiuti -- Needham & Company -- Analyst

That's helpful, Al. And you kind of touched on it, but I guess the question is, within Aerospace and Defense, are you seeing any disruption in the commercial aerospace portion of the business in light of some of the challenges that Boeing has been facing?

Robert Mehrabian -- Executive Chairman

Not at this time very much. There are -- we are a supplier to Boeing in the 737 MAX. And so we expect some softness in that area until they resolve their issues. And so, we probably will have to take a little bit of a haircut there. We probably delivered perhaps $3 million, $4 million less product. We have about a plan to deliver about $13 million, $14 million. And (inaudible) mostly primarily because the stoppage in taking product from customers is right now in limbo, but we know Q2 is going to be soft in that domain. So that would be the major negative to our aerospace business. Other than that, I think we're doing OK.

Jim Ricchiuti -- Needham & Company -- Analyst

And if I may, last question, just on the industrial machine vision area, I heard from one camera supplier that they are actually starting to see some signs of a pickup and maybe it's because there is some easier comparisons coming up in the second half of the year, but are you seeing any signs of that?

Robert Mehrabian -- Executive Chairman

Yeah, there is some movement. As you know, the OLED manufacturing lines have been pretty quiet in terms of new production coming online. But we are seeing some signs of that. Right now, again, just like I started, it's difficult to predict. But we think that while we started Q1 with digital imaging less than 1, we think the second half is going to be much stronger and we're projecting that we'll end the year a little over 1 with our book-to-bill. And so we expect the rest of the year, especially Q3 and Q4 to be stronger as more lines come online, more production comes online.

Jim Ricchiuti -- Needham & Company -- Analyst

Thank you. Thanks very much.

Robert Mehrabian -- Executive Chairman

Thank you.

Operator

And we do have a question from the line of George Godfrey with CL King. Please go ahead.

George Godfrey -- CL King -- Analyst

Thank you very much. Nice quarter again, gentlemen. Wanted to ask about the operating margin in the instrumentation, really nice increase. Did the margin across marine, environmental or test and measurement vary within the instrumentation, or is it roughly all about the same?

Robert Mehrabian -- Executive Chairman

No. They do vary, George. In the test and measurement, we're in the high teens. In the environmental, we're closer to 20% and in the marine, we are lower within the 11% range, probably go up a little bit as the year goes on, but there is a discrepancy between marine and what we call environmental and test and measurement groups with environmental having the highest margin.

Having said that, we expect for the full year, the total instruments, the combination of marine and all, that last year was about 14.4% being negatively affected by marine. We think we'd be up about 200, 210 basis points this year by the time we end the year to about 16.5.

George Godfrey -- CL King -- Analyst

Got it. And I heard you give the organic revenue growth for the quarter as a whole. Can you give us by the segment please and that's it. Thank you.

Robert Mehrabian -- Executive Chairman

Sure, George. Let me just kind of get my numbers. I think in the instruments overall, it was about 7.3% with marine being the lowest, just around 1%. The rest of it made up by environmental, and test and measurement. In digital imaging, organic was about 4.8, in Aerospace and Defense Electronics, it was 3.9 and in Engineered Systems it was 1.5, with that sums up to 5.1 for the total portfolio.

George Godfrey -- CL King -- Analyst

Thank you very much, Robert.

Robert Mehrabian -- Executive Chairman

You bet. Thank you.

Operator

(Operator Instructions) And we do have a question from the line of Joe Giordano with Cowen. Please go ahead.

Joe Giordano -- Cowen -- Analyst

Hey guys, good morning.

Robert Mehrabian -- Executive Chairman

Good morning, Joe.

Joe Giordano -- Cowen -- Analyst

Happy to be on here for the first time.

Robert Mehrabian -- Executive Chairman

Thank you. Happy to have you on.

Joe Giordano -- Cowen -- Analyst

I'm curious, in the Instrumentation segment here, is your oscilloscope business accelerating right now or is it decelerating. I know it's growing and you're doing well, but kind of hearing some different color from different players in that space. So, just curious there.

Robert Mehrabian -- Executive Chairman

Right now it's accelerating at least so far in Q1, it's been up about 12% year-over-year. The -- but -- that's just oscilloscopes. But as I mentioned before, the protocol analyzes are doing much better than that.

Joe Giordano -- Cowen -- Analyst

And sticking with that, I know it's the energy piece is long cycle. So it takes a lot to play through. But can you talk maybe about the leverage that you'd have to that book-to-bill as it starts to flow through revenue, given how much cost you've taken out and how much smaller that business is and then at peak?

Robert Mehrabian -- Executive Chairman

Yeah, you're right. At the peak, which was 2014, that business was about $650 million. We think it's going to be closer to $450 million this year and that's with some growth from last year. So significant down in revenue. On the other hand, as you mentioned, we've taken a lot of cost out and our margins are continuously improving. The first quarter, we had really -- no, we didn't enjoy a whole lot of improvement. We had -- sales were up about 1%.

I think second quarter is going to be a little tougher, but our orders are good. We think Q3 and Q4 are going to pick up and I think by the end of the year we should approach about 4.5%, 4.2% in revenue growth, which would be an exceptionally good year considering how bad the last three, four years have been.

Joe Giordano -- Cowen -- Analyst

Can you maybe just scale -- I think you mentioned marine margin something like 11% or so. What was that when that business was peak?

Robert Mehrabian -- Executive Chairman

Well, it was over 18%. It was great.

Aldo Pichelli -- President and Chief Executive Officer

Yeah.

Robert Mehrabian -- Executive Chairman

We suffered through that one, but we've taken a lot of people out, maybe a third of the workforce, but also we consolidated a lot facilities both here and abroad, and we think what's happening is that business, especially the offshore part of it, the projections are you grow, at least the projections from our customers in the last two weeks in the earnings are between 7% and 14%, 7% on the low side, 14% being on the high side. We're seeing a lot more quotes. We're also for the first time seeing a little more -- we're enjoying a little more pricing advantage. It used to be, price, price, price. But now people are more concerned about, can you deliver on time, considering that you have downside so much. So, it's -- we think that there'll be a lot more opportunity as we close this year, third quarter and fourth quarter, and certainly in 2020.

Joe Giordano -- Cowen -- Analyst

If I can just sneak one last one in, you mentioned some of the new projects, new multi-year orders you won in, I guess, largely in Defense Electronics, if you can maybe expand on that a little bit and maybe if there's an update on the contested contract that you guys had on the missile defense simulation work?

Robert Mehrabian -- Executive Chairman

Yeah, an example of the Defense Electronics contract, one large contract is the Silent Knight radar, those are radars that go into our helicopters and they're basically used to be able to track the ground and stay automated, be able to fly automated by looking forward and back and being able to stay 500 feet above ground. That's a nice big contract for us. We do have a integrated Defense Electronic countermeasures program which is called (inaudible) and that is also a nice big contract for us. But I have to say, within the Defense Electronics, we also do have a commercial program, which is the one word (ph) program where we are delivering channelizers for their -- which is a big part of their satellites. So that's one.

Let me go back to the TBE or our Engineered Systems segment that you brought up. First, the -- even there we have some new programs that we've enjoyed recently. Our shallow water program is doing very well. Let me go back to the question you asked on mask. That was -- as you know, that was a sequential program to our objectives simulations framework and that was awarded -- but that was at least, that was announced that there was another winner in that program. We objected to it, rightfully so because there were some -- in our view, there were some serious protests, there were some serious irregularities. And we've been in that program for almost 20 years and the performance was rated very highly.

So, the protest is still -- they are investigating, there was not what you'd get -- anticipate the usual short cycle answer that, the thing was done properly, they are investigating and they -- we don't know when they're going to come out with a decision. We think we have a good case. In the meantime, we are continuing to perform on the program. So, that's where that stands.

Joe Giordano -- Cowen -- Analyst

All right, thanks guys.

Robert Mehrabian -- Executive Chairman

Thank you.

Operator

(Operator Instructions)

Robert Mehrabian -- Executive Chairman

Thank you, Brad. If there are no more questions, I'll now ask Jason to conclude our conference call, please.

Jason VanWees -- Executive Vice President

Thanks. Thanks, Robert and thanks everyone for joining us this morning. If you have any follow-up questions, please feel free to call me at the number on the earnings release and Brad, if you wouldn't mind, if you can just give the replay information at the end of the call and webcast here, that would be ideal. Thank you, everyone.

Operator

And ladies and gentlemen, today's conference will be available for replay after 10:00 AM today, through May 24. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 entering the access code 464930. International participants may dial 320-365-3844 and those numbers again are 1-800-475-6701 and 320-365-3844, again entering the access code 464930.

That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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